Exploring Lenovo’s Pathway to the Future

Bernardo De Niz/BloombergWhile Lenovo is one of China’s largest mobile phone makers, only a small part of its sales are smartphones.

With rivals Hewlett-Packard and Dell making headlines in the acquisitions market this year, the Chinese computer maker Lenovo reminded investors this week that it was also in the hunt.

“We will be looking for opportunities that will relate to our core business,” Reuters quoted Lenovo’s chief financial officer, Wong Wai Ming, as saying this week during the company’s earnings call. Mr. Wong added that “it is difficult to give you any specifics now.”
Lenovo, based in Beijing, has over the years wrestled with its strategy as rivals like Dell and H.P. have spent freely.

“I think the jury is still out, in regards to how crisp or not crisp their strategy is,” said Richard Wong, a partner in the venture capital firm Accel Partners.

“There’s this general perspective that mobile and tablet devices are now part of the personal computing continuum, and Lenovo really needs to re-evaluate its strategy,” he added. “I think it’s very likely that Lenovo and a number of other manufacturers are going to be pushing” toward software services that sit on top of their core hardware.

Lenovo’s chief executive, Yang Yuanqing, offered some hint in April when he told The Associated Press that in the next three to five years, 70 to 80 percent of the company’s revenues would come from mobile Internet products.
While it is unclear how the company will determine what constitutes a mobile Internet product, 4 percent of the current revenue comes from mobile sales, including smartphones, while 93 percent comes from desktops and laptops.

In an e-mail, Lenovo said that it could not comment on its acquisition strategy.
Analysts expect Lenovo to move cautiously. Though the company has about $2.3 billion in cash reserves, few analysts expect an acquisition on par with H.P.’s recent $2.35 billion takeover of 3Par, the enterprise data storage company.

Most expect Lenovo to pursue a two-pronged strategy: investing in personal computer companies in strategic emerging markets and buying local software companies to augment its growing mobile business, particularly in China.
As compact mobile devices have come to dominate the market, computer makers have had to diversify beyond the low-margin, bread-and-butter business of laptops and desktops. Toward that end, H.P. has made more than $7 billion in acquisitions this year; the mobile handset maker Palm ($1.2 billion); the networking gear maker 3Com ($2.7 billion); the cloud music service Melodeo ($30 million); the security software firm Arcsight ($1.5 billion); and 3Par, which it wrestled away from Dell in a highly publicized tug of war.

For its part, Dell bought the informational technology consulting firm Perot Systems for $3.9 billion in 2009, and more recently, Boomi, a cloud computing integration service, for an undisclosed sum.

Dean Lim, an analyst at Mirae Asset Securities, said Lenovo was too dependent on its computer businesses to ignore acquisitions that would help drive sales in emerging markets like India and Brazil.

It is a strategy Lenovo has pursued in the past. In December 2008, the Brazilian computer maker Positivo rejected a takeover offer from Lenovo that was reportedly worth about $800 million; market speculation in April had Lenovo renewing its discussions with Positivo.

The more interesting part of the puzzle, several analysts said, is whether and how Lenovo will use acquisitions to expand its nascent mobile business.
Lenovo started its mobile division in 2002 but had a slow start — and then a restart. The company eventually sold the division to a private equity firm for $100 million in 2008 (to better focus on the PC business), only to buy it back for $200 million in November 2009.

Since the repurchase, Lenovo has tried to make up for lost time, introducing the LePhone, its revamped Android-based smartphone, in China this year. It has also announced plans for the LePad tablet and reaffirmed its commitment to becoming a mobile-centric company. Second-quarter shipments of mobile devices rose 41 percent from the period a year earlier, Lenovo said in its most recent quarterly report.

According to Gartner Research, Lenovo is one of the largest mobile phone makers in China, with 3 percent of the market. But only 182,400 of the 8 million devices that Lenovo sold in China in the first three quarters of 2010 were smartphones, Gartner said. Over all, 17.8 million smartphones and 270 million mobile devices were sold in China during that period.

Mr. Wong of Accel Partners said a string of acquisitions, especially on the software side, might be the key to rapid innovation for Lenovo. If the company pursues software acquisitions for its mobile division, several analysts expect Lenovo to pick homegrown players that are deeply entrenched in China’s culture.

Unlike many of its rivals, Lenovo’s mobile strategy is not fixated on the United States or European markets, said Wanli Wang, an analyst with HSBC Securities.

That could give it a significant advantage in China, the world’s largest mobile phone market and, for now, the second-largest smartphone market after the United States.

“Lenovo’s target is still on China’s market because it’s the home market and because of its vast potential,” Mr. Wang said. “They understand their customers and what they like more than any other vendor. In China, you have to know the local flavor.”